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April 12, 2011

New Study Finds That Rural Broadband Subsidy Program Wastes Funds in Areas Already Served by Broadband

WASHINGTON, D.C. – A new economic analysis of federal government broadband stimulus projects awarded by the Department of Agriculture's Rural Utilities Service (RUS) concludes that the program's funding of duplicative broadband networks has resulted in an extremely high cost to reach a small number of unserved households. The study was commissioned by the National Cable & Telecommunications Association (NCTA) and prepared by Jeffrey Eisenach and Kevin Caves of Navigant Economics of Washington, D.C.

The American Recovery and Reinvestment Act (ARRA) included $7.2 billion to subsidize broadband deployment – $4.7 billion to the National Telecommunications and Information Administration (NTIA) and $2.5 billion to RUS. The NTIA and RUS programs funded by ARRA make up the largest federal subsidies ever provided for broadband construction in the U.S.

The study shows that the RUS' history of funding duplicative service has continued under its Broadband Initiatives Program (BIP) and that the current program is not a cost-effective means of achieving universal broadband availability. It examined three large BIP subsidy awards which total $231.7 million, or about seven percent of the total BIP $3.5 billion combined loan and grant program:

$101.2 million in western Kansas

$66.4 million for Lake and St. Louis counties in northeastern Minnesota

$64.1 million to cover a portion of Gallatin County in southwest Montana.

"Reports by the Department of Agriculture's Inspector General (AIG) and the Government Accountability Office (GAO) have shown that RUS' prior broadband subsidy programs have not been cost effective, in part because they have provided duplicative service to areas that were already served by existing providers," the study says.

NCTA said that the study raises critical issues that were still not addressed in the RUS' "interim final" rules, which were just adopted last month. The new rules will enable RUS to continue funding duplicative broadband networks, even in communities where the vast majority of households already have access to broadband service.

Among the key findings in the study are the following:

Definitions used by the RUS to determine where grants should be awarded permitted subsidies to areas which were already served by multiple wireline and wireless providers. Of the three projects analyzed, more than 85 percent of households were already passed by existing broadband providers, and in one project area, more than 98 percent of households were already passed by at least one provider.

Based on the cost of the direct grants and subsidizing the loans, the study estimates that the cost per incremental home passed will be $30,104 if existing coverage by mobile broadband providers is ignored, and $349,234 if mobile broadband coverage is taken into account.

The RUS approach of funding duplicative coverage is directly at odds with the National Broadband Plan recommendations and would massively increase the cost of extending broadband to all unserved homes. The FCC's Omnibus Broadband Initiative estimated that the cost of extending broadband to every unserved household in the U.S. is approximately $23.5 billion, so long as duplicative service is not funded. But funding duplicative service (as RUS has done under BIP) increases the cost of a nationwide buildout by $63.7 billion, to $87.2 billion.

"While it may be too early for a comprehensive assessment of the ARRA's broadband programs, it is not too early to conclude that, at least in some cases, millions of dollars in grants and loans have been made in areas where a significant majority of households already have broadband coverage, and the costs per incremental home passed are therefore far higher than existing evidence suggests should be necessary," the study says.